Friday, May 29, 2009

Get ready folks: America is about to own a car company. As of Monday, we the taxpayers will own more than 70 percent of GM. Whether the company will be formally renamed Government Motors remains to be seen. But that’s what it will be.

Instead of putting the failed car enterprise into bankruptcy six months ago -- where Carl Icahn or Wilbur Ross could have bought it -- the Bush administration chose Bailout Nation. Under Team Obama, that bailout has morphed into full-scale government ownership. Twenty-billion dollars of TARP money is already invested in GM, with another $50 billion on the way. And that number could easily double unless GM car sales miraculously climb back to 14 million this year. That’s highly unlikely, with car sales presently hovering around 9 million a year.

In other words, taxpayers are not going to get their money back. Yes, we the people will be left holding the bag for the mistakes of GM’s management and labor leaders over the last four decades.

And with CAFE mileage-standards ratcheting up -- all while GM is going down -- Team Obama’s green vision for the economy will soon be crystal clear. With President Obama in the driver’s seat, we’re going to get little green two-door cars that most folks won’t want to buy.

Even worse, UAW chief Ron Gettelfinger has made it plain that his powerful union won’t let these cars be manufactured in low-cost non-union plants overseas. The result? Obama’s little green cars are going to be unprofitable as well.

But it’s the bigger picture that has me most concerned. What does Government Motors say about the direction of the United States? Historically, we don’t own car companies --or banks or insurance firms. But we do now. Tick them off on your fingers: GM, Citi, AIG. Oh, and let’s not forget Fannie and Freddie, those, big quasi-government, taxpayer-owned housing agencies. California is broke and likely headed to bankruptcy. Will we the taxpayers own that, too?

Altogether, we’re talking about hundreds of billions of taxpayer dollars that will never be repaid. This is the stuff the Italians used to do, and the Brits before Thatcher, and the Soviets a long time ago. But it’s something very new and very different for America.

Is this onslaught of government ownership an attack on free-market capitalism? Yes it is. Call it Bailout Nation or Ownership Nation, it’s an unprecedented degree of government command, control, and planning, all in the name of a tough economic downturn.

I don’t pretend to know all the answers to GM’s problems. Neither do I know all the miscues of the banks and insurance companies. But I do know this: The present level of government control over the economy does not bode well for this great country.

When I sat down with former Vice President Dick Cheney for a CNBC interview this week, I asked him about all this. He wasn’t happy. Of course, many of these policies began during the Bush-Cheney administration, and Cheney didn’t deny it. But when I asked if he anticipated the current degree of government control, he gave me another honest answer, as is his custom: No.

Regarding the banks, Cheney said the bailout work was done over at the Treasury (under Henry Paulson), and that no critical studies were performed by the White House. Cheney himself opposed the GM bailout, preferring Chapter 11 bankruptcy. He did sign on to the TARP bailout of banks as a stop-gap measure. But he didn’t anticipate its eventual size, scope, and sweep. Then, squarely acknowledging the mistake, he compared Bailout Nation to Nixon’s wage-and-price-control program, which touched every enterprise in America. He called it “a terrible mistake; a huge mistake.” By implication, Cheney suggested that the original Bush bailout program was itself a big mistake.

As for Nixon’s wage-and-price-control policy, the former veep reminded me that “we finally got out of it, but it took a long time to do it, and it [did] a lot of damage.”

Cheney was very critical of Obama’s big-government spending-and-borrowing policies, too, telling me that there are only two ways out: inflating the money supply or big tax increases. He doesn’t like either. Yes, Cheney believes Obama has taken Bailout Nation and government stimulus way beyond anything the Bushies ever contemplated. Nevertheless, the damage is done.

Cheney recalled Bush having said that “we have to suspend free-market capitalism in order to save free-market capitalism.” So the big question is this: How long before we resurrect free-market capitalism, and how much damage will current policies do in the meantime?

I won’t lose my faith in this country’s long-term future. But the issue of how much damage we sustain before returning to the policies of free-market economic growth is very much on my mind.

I was interviewed earlier today on AM 560 WIND Talk Radio in Chicago and offered my take on a number of topics including "Jack Kemp Republicanism", our current financial crisis, the Obama administration, GM bailout and much more.

Former Vice President Dick Cheney told me yesterday that Obama’s Big Government-Bailout Nation-TARP-GM rescue efforts were a big mistake. He compared it to Nixon’s wage and price controls. He also inferred that former Treasury Secretary Henry Paulson drove the process, not the White House. And Mr. Cheney himself totally opposed the GM bailout. He also welcomed Colin Powell back inside the GOP tent, but with strict conditions. And he said that Team Obama is totally nuts to de-fund the missile defense program in the face of North Korean nuclear developments.

Former Vice President DICK CHENEY: Well, it's good to see you again, Larry.

KUDLOW: Thank you, sir. Let me begin. I want to talk about the economy and business and perhaps we'll get to the foreign policy troubles in the back end. Despite a torrent of conservative criticism over President Obama's economic policies, there are, nonetheless, unmistakable signs of economic recovery. In fact, in the news this morning, we had home sales rising. We've had leading indicators rising, we've had better credit spreads. The stock market is up about 35 percent from its lows in early March. Let me ask you, sir, is there an economic recovery out there in your view?

Mr. CHENEY: Well, Larry, I'm reluctant to tell an economist what's going on in the economy.

KUDLOW: It never stopped you in the past.

Mr. CHENEY: Well, that's true. It never stopped me before. No, I've always been impressed with the tremendous resilience of the American economy. I think over the years, over the decades, it's demonstrated this tremendous ability to take severe body blows, if you will, and bounce back. And I think what we're seeing here at some point the recession's going to end, at some point we're going to enter into recovery, and I think I see, as you do, some signs out there that are positive. I follow the stock market, home sales and unemployment numbers and so forth, and they all seem to indicate that we're--if we aren't at the bottom, we're getting close.

KUDLOW: All right. Will President Obama, therefore, get credit? Again, with the barrage of criticism coming from conservatives and so forth, if there is an economic recovery, isn't he going to get a lot of credit for it? Isn't that going to be a very powerful political plus for him? Regardless of causality, nonetheless, that's the way this game works, does it not?

Mr. CHENEY: Well, I think that's the way it's worked in the past, to some extent, but I--the thing I'm concerned about and the thing that I think ultimately is the most important set of issues or concerns, if you will, in terms of how this economy's being managed is what the long-term consequences are of the policies that have been put in place by the Obama administration. And we have short-term swings in the economy. I have, you know, if the economy turns up now, we come out of the recession, that's fine, it's all to the good. I hope that happens and, if he had something to do with it, he deserves some of the political credit for it. The problem--the big problem I have, though, is that I think the recession we've been through is being used by the administration in ways that fundamentally change the relationship between government and the private sector. That's what worries me most.

KUDLOW: You know, this business of unprecedented interference in the private sector, as you've just described, I mean, we can walk through the issues. Basically, the government's going to own General Motors. Some people call it Government Motors, that's a big story on the front pages today. They're going to take 70 percent of the new General Motors. The government already owns AIG. The government owns Fannie Mae. The government owns Freddie Mac. There's a lot of discussion about the government interfering, intervening in the tax-free municipal bond market to help states run money. Mr. Obama himself told C-SPAN over the weekend, in an interview, that the US was out of money because of the unprecedented spending and borrowing. Now, is that what you're referring to? And I want to be direct here, some conservatives say Mr. Obama is a socialist or a socialist-light, and he's running socialist type policies. Do you agree with that criticism?

Mr. CHENEY: Well, I agree with the criticism without using the labels. I don't want to get into trying to label President Obama. He's our president. At this point, he's the only one we've got. He won the election, and he obviously is entitled to pursue those policies that he wants to pursue. My concern is that we entered this period with a big, big problem, with the whole area of entitlements, Social Security, Medicare, the expectation that we were going to run out of money not too far down the road in terms of keeping those basic commitments. Nobody even talks about that anymore. And what we've been seeing, though, and what's been advocated by the president and what looks to be in store if he's successful is that we're seeing a vast expansion, not only the power of the federal government over the private sector, but also in terms of spending. Massive, massive amounts of new spending and presumably new taxes to pay for it that I think will do fundamental, long-term damage to the country. And I do think it's a more liberal agenda, if you will, than any in recent memory.

KUDLOW: But, in truth, isn't it fair to say that many of these policies, central planning policies, command and control interference policies, whether it's socialism-light or European market social kinds of policies, they really began under the Bush-Cheney administration, did they not? I mean, after all, Fannie Mae and Freddie Mac are under government ownership 80 percent. That began under your administration. The first General Motors loan began under your administration. And, of course, the great TARP program to allegedly prop up the banking system, which has turned out to be partly bank ownership, we don't know the last story on that. No one knows when TARP is going to ended. All these things really began under your administration. At what point President Bush, I believe, said we have to--we have to stop--we have to suspend free market capitalism in order to save free market capitalism. What's your take on that? How much blame of this shift to the left do you think the Bush-Cheney administration bears?

Mr. CHENEY: Well, I would--I would bust it up into two segments, Larry. I think there's no question but what the tail end of the Bush administration, Bush-Cheney administration, that we took steps specifically geared to try and free up the financial sector. There was the view reporting from economists, from the Fed, from Treasury and so forth that the credit system of the country had, in effect, frozen up or was close to it, and when you get into that kind of situation, the government is the only area of last resort with respect to trying to deal with those issues. You can't fall back on the private sector and say, `You take care of the nation's banking system.' That's a fundamental function of the government, the Federal Reserve, the Treasury and the FDIC, etc. All of those agencies have a major role to play there.

KUDLOW: But if I may...

Mr. CHENEY: If it's not working, then the federal government has to deal with it.

KUDLOW: But did you anticipate the degree of government control over the banks? No question throwing a safety net from Federal Reserve liquidity was appropriate. I don't think any economist left or right disagrees with that. On the other hand, what we've seen now is that this Congress has moved in to declare, for example, compensation and pay limits, repurchase agreements, dividend policies, merger and acquisition policies. You yourself know these things because you were a CEO of a big company once upon a time. Did you anticipate how Congress would move in to take control of the banks when you made these initial loans?

Mr. CHENEY: No, I don't believe we did. I don't recall any debate within the administration. There may have been some over at Treasury or someplace that focused on the extent of which government would try to control these institutions once they provided financing for them. You know, I've got experiences going back to the wage price controls in the Nixon administration where, in effect, we had what I think was a terrible mistake, in that case a Republican administration, where moved in and tried to control the wages, prices and profits of every enterprise in America. It was a huge mistake. We finally got out of it, but it took a long time to do it, and it does a lot of damage. One of the things we see now, you mentioned it, is the fact that government, in some cases Congress, in some cases the Obama administration, telling General Motors they've got to fire Rick Wagoner, making decisions that traditionally and historically have been made by the private sector.

KUDLOW: And running roughshod in the bankruptcy proceeding with Chrysler, running roughshod over the bond holders...

Mr. CHENEY: Mm-hmm.

KUDLOW: ...thereby abrogating contract rights. I mean, did you think, for example, when you made the first loan to GM and Chrysler, at the end of the administration, of your administration, did you think at that time the government would wind up owning 70 percent of General Motors? Some people now calling it Government Motors.

Mr. CHENEY: Well, some of us at the time wanted GM to go bankrupt, go to Chapter 11.

KUDLOW: Were you in that camp?

Mr. CHENEY: I was. The decision was made that, in the final analysis, since our administration was almost over and a brand-new team was about to take over that the president wanted, in effect, not to take a step that wasn't necessarily going to be followed by his successor, but rather to set up a situation which the new guys could address that issue and make a decision about what the long-term policy was going to be. And we came up with a short-term package, in effect, that got us through the--through the inauguration.

KUDLOW: What would you do differently now? Again, you, in some sense, I think a clear sense, that the Bush-Cheney administration laid the groundwork for this big government intervention. Mr. Obama is taking it further probably, perhaps, than you all might have, although one will never know. But what would you be doing differently right now?

Mr. CHENEY: Well, I think the budgets he submitted are way out of whack. I think what it does not only to the short-term deficit but long-term debt situation is very objectionable. I think the notion that we're going to get up to a point where the debt equity ratio for the country's going to be what, over 50 percent, 60 percent? I've seen even 80 percent at the end of a 10-year period of time.

KUDLOW: Some people are worried the United States is going to lose its AAA credit rating.

Mr. CHENEY: Well, that's got to be of concern. The last time that we had debt to equity ratios, or debt to GDP ratios was 1950...

KUDLOW: Yeah.

Mr. CHENEY: ...at the end of World War II after we'd fought a major war and obviously had major governmental obligations as a result of that. So I don't hear anybody in the administration expressing concern over that massive growth in the national debt and what's that going to mean long-term in terms of our currency, in terms of inflation.

KUDLOW: Is it going to lead to a general sales tax? Big story in The Washington Post this morning about talk of a national sales tax or a VAT, a value added tax, which will ultimately be brought in play--it's a European-style tax--to finance all the spending and borrowing. Do you think there's a VAT tax in America's future?

Mr. CHENEY: I would hope not. We're at a point now where to look at the levels of spending that are being contemplated, six hundred and some billion dollars, for example, in unfunded planning with respect to their medical reforms, somebody's got to pay for that in some fashion. It'll be paid for either by printing more money or raising taxes. He's already talking about a set of policies that I think grossly undermine the notion that the way you grow the economy is to stimulate the private sector, to minimize government's role in the private sector, to cut taxes as much as possible, to minimize the regulatory burden that the government imposes on the private sector. All of those principles that I think a lot of us believe in are now pretty much being ignored in favor of a much larger government, a much greater involvement in the society--you say ownership of General Motors, etc.--so that we're seeing some very, very fundamental changes with the important political as well as economic consequences.

KUDLOW: Speaking of political, I guess you're trying to outline a message for the Republican Party here to limit government and limit taxation and so forth. You kind of took a shot at General Colin Powell the other day, said you didn't know he was still a member of the Republican Party. He responded to you by saying that you were mistaken. He is a member of the Republican Party, and he regards himself a, quote, "Jack Kemp Republican," end quote. Could you react to what Mr. Powell is saying?

Mr. CHENEY: Well, we're happy to have General Powell in the Republican Party. I was asked a question about a dispute he was having, I think, with Rush Limbaugh, and I expressed the consent, the notion I had that he had already left since he endorsed Barack Obama for president. But I meant no offense to my former colleague. I wasn't seeking to rearrange his political identity.

KUDLOW: So you welcome him back into the party.

Mr. CHENEY: We're in the mode where we welcome everybody to the party. What I don't want to do, in the course of trying to expand the overall size of the Republican Party and expand our base, is to talk away from basic fundamental principles. I think it's very important that we remind people out around the country what it is that we stand for, that we do believe in a strong national defense, in low taxes and limited government; and giving up on those principles, in order to try to appeal to people who are otherwise going to vote Democratic, seems to me is a--would be a fundamental defeat for those of us who are essentially conservative, who've been long-time supporters of the Republican Party.

KUDLOW: Let me just in the remaining moments go back to another headline, unfortunately, and that is North Korea's launching all these nuclear missile tests. Last evening they launched some more. I do know intelligence agencies may or may not have expected this barrage. What is your comment on this? And how in the world are we going to deal with North Korea, which has become a long-term and vexing problem?

Mr. CHENEY: It is one of the biggest problems out there today. It's a difficult one that we dealt with, obviously, and the Obama administration's now facing a major test. They've set off another nuclear device. They have been proliferators in the past, both of nuclear technology and missile technology. They did, of course, build a nuclear reactor in the Syrian desert designed to produce plutonium for the purposes of having Syrian nuclear weapons and that got shut down when the Israelis bombed it. The fact is the North Koreans are one of the worst operators in the world today, and you've got to find some way to change the course they're on or they're going to be a major threat. One of the things that I think is a wrong thing to do is, at this particular time, to cut our program for missile defense in the Defense Department. That's more important than ever when you've got a rogue nation out there, like North Korea, that operates in accordance of a whole different set of standards than normal people do, with the possibility that they can ultimately deploy a weapon that could hit the United States.

KUDLOW: Why do you reckon that Secretary of Defense Gates, himself a Republican, served under numerous Republican administrations, is going along with this?

Mr. CHENEY: I don't know. I haven't talked to Bob about it. Bob stayed on because he was asked to stay on. I thought it was a good thing that he did continue in office, but, obviously, somebody made the decision and he's supporting it to reduce the amount of money that we devote to missile defense. We've gotten a long way on missile defense. We know how to do it. We know how to take down incoming warheads, but we need to do a lot more work in order to be--to deploy a system that'll defend the United States against those kinds of limited strikes that might be possible by a nuclear armed North Korea or Iran.

KUDLOW: Isn't the absolute key at the end of the day China? And couldn't the US, working together with China, essentially defund, definance what's left of North Korea's economy and stop the power flow into North Korea, just cut off their power all together? Beyond that seems like it's more empty talk to me. UN conferences and resolutions seem to have virtually no meaning. Isn't this China the key here?

Mr. CHENEY: I think it is. I think you're absolutely right, Larry. The Chinese have got a long international border with North Korea. They have more commerce with North Korea than anybody else. They clearly are in a position, if anybody is, to try to put the screws to the North Korean economy to get them to change their behavior. So far, they've been willing to enter into the six party talks, but that's about the end of it. There have been no real sanctions, no penalties imposed on North Korea for their past behavior. And every time they go through one of these cycles, then they go out and demand--the North Koreans demand more concessions in order to get--go back to the table again to resume the talks. But, through this process, we've had numerous missile tests, we've had now two tests of nuclear weapons in '06 and then again now. We've had them building the reactor in Syria for the Syrians. These are probably today the worst proliferators in the world of nuclear weapons technology to rogue regimes or to terrorist-sponsored regimes.

KUDLOW: Is there's one--final question--is there one piece of advice you would give President Obama right now to deal with this North Korean problem?

Mr. CHENEY: Well, going forward, I'd say insist upon the North Koreans keeping their commitments, and when you say you're going to impose sanctions, impose sanctions, make them stick. And again you've got to work with the Chinese if you're going to try to do this peacefully. I think you also need to emphasize the fact, and I think it is a fact, that--and this is an argument to be made with the Chinese as well as others in the region--that if the North Koreans are successful in deploying a significant nuclear capability, that others in the region who have the capability, the technical capability, are going to want to do the same. The Japanese are going to have to reconsider their no nukes policy. Taiwan could be in that camp, certainly South Korea. All of these states living in an area where you've got a North Korean government that has nuclear weapons and is as irresponsible as it has been for decades are going to have to reconsider what they require for their own security. China needs to understand that the whole region is likely to become less stable.

KUDLOW: Hm.

Mr. CHENEY: And I can't believe that it's in their interest to have any of those developments occur that ought to give the Chinese the incentive to work with us to get the North Koreans to stop.

KUDLOW: We're going to have to leave it there. Mr. Vice President, I can't thank you enough for this interview and I wish you all the best.

Wednesday, May 27, 2009

In my interview today with Dick Cheney, the former vice president takes aim at Obama’s economic program, calling it “a vast expansion of the federal government over the private sector that will do long-term damage to the country.” But he also acknowledges that the Bush administration’s launching of TARP and the GM bailout were not well thought out. He’s surprised at the degree to which Congress is taking control over the banks, GM, and other areas of the economy. He actually likens TARP to the Nixon wage-and-price controls, which he calls “a terrible mistake.” On the North Korea nukes, Cheney tears into Obama for defunding the U.S. missile-defense program.

You can watch the entire interview tonight at 7 p.m. on the Kudlow Report.

Everyone should closely read today’s Washington Poststory on the value-added tax, or VAT. The cat is now out of the bag. For months I have argued that Team Obama and the Democratic Congress were going to be forced to consider a VAT in order to pay for their extravagant spending. Now borrowing almost 50 cents on every new dollar spent, the Democrats will at some point begin to deal with the politics of deficit reduction as a way of countering Republican criticisms about deficit expansion. And the VAT’s part of their answer.

Senate Budget Committee chair Kent Conrad calls the VAT “fundamental tax reform,” and he argues for a VAT plus high-end income-tax hikes. The WaPo story talks about a White House conference earlier in the year where “a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT.” Budget chief Peter Orszag hired prominent VAT supporter Ezekiel Emanuel — the brother of White House staff director Rahm Emanuel — as an adviser.

Of course, President Obama blew an even bigger budget hole into long-run planning with a cap-and-trade proposal that would exempt 85 percent of the tradable emissions warrants from any auctions. In other words, it’s a free lunch, making a bad idea even worse. But the Democrats are going to want to hang on to their massive increases in social-spending transfer payments, along with the big expansion of health care and who knows what else.

Now remember, this VAT tax would come on top of existing income, payroll, and business taxes. This is how the European countries and many others do it. And the VAT is a tax imposed throughout the economic food chain, at all levels of production, finally ending up inside the consumer pocketbook.

The VAT is a sure way to permanently depress economic growth. It’s also a sure way to Europeanize the American economy. But at some point, after the economy gains at least some cyclical economic-recovery traction, the Obama Democrats will want to re-label themselves as deficit-reduction fiscal hawks. Hence the VAT, a real bad idea.

Thursday, May 21, 2009

Here's the footage of my commencement address to Monmouth University's graduating class yesterday where I received an honorary Doctorate of Laws. I delivered an optimistic message to the graduates who I exhorted to go out there and make their way in the world. There are opportunities galore in this great country of ours, as long as we keep it free. One man, one woman, can make a huge difference. I loved doing it. It was a great honor.

Monday, May 18, 2009

Stocks had a huge rally today, including a Dow gain of 235 points. This is a very important signal of economic-recovery confidence. At least that’s how I’m reading it.

The brief correction appears to be over. And all sorts of important technical breakouts were registered in today’s bullish trading. Despite the future threats from Team Obama about command-and-control economics, corporate tax hikes, nationalized health care, and the cap-and-trade tax, the most important reality for share prices is still the near-term expectation of a cyclical economic recovery.

Long-term prospects are not nearly as good because of the administration’s lurch to the left and war against capital. But the stock market has in its sights a second-half economic rebound that will carry through next year.

Most of this rebound is a function of massive Fed liquidity pump-priming and the steeply upward-sloping Treasury yield curve. These factors will stimulate total spending in the economy, coupled with bank profitability.

Other good news out there: The communists were put to rout in the Indian elections. This suggests that India will take new steps to liberalize its economy, including foreign investment, free trade, privatization, and tax cuts. This is a big plus for global economic recovery. And the Indian elections may well have triggered the stock rally right from the opening bell this morning.

Plus: Morgan Stanley will probably de-TARP, along with Goldman Sachs, JPMorgan, and perhaps others. No one knows for sure, but I think of de-TARPing as a kind of falling of the Berlin Wall. Let economic freedom ring. Let banks get out from under the yoke of government controls.

Yes, there will be shareholder dilution as the banks raise new equity capital. But the thought of banks freeing themselves from Team Obama way offsets any near-term dilution issues.

And out on the Left Coast, California voters look set to deny big state-government taxing-and-spending initiatives in tomorrow’s election. It’s a Prop 13-like vote. And it suggests that the Tea Party movement is in fact indicative of a tax-and-spend revolt going on around the country.

All of this combined to give the investor class a well-earned rally in today’s stock market.

Speaking near Albuquerque, New Mexico, at a town-hall meeting on Thursday, Pres. Obama said the federal debt load is unsustainable and warned of skyrocketing interest rates. He neglected to say that his massive spending-and-borrowing policies are directly causing this problem.

Now, I have a thought. Stop this massive spending and borrowing. It’s making George W. Bush, Lyndon Johnson, and FDR look like fiscal conservatives. We are borrowing 50 cents for every federal dollar we spend. And deficit spending combined with excess money-creation by the Fed is a surefire way to create slow recovery growth combined with higher inflation.

Perhaps this is why the stock rally has stalled. And raising taxes on entrepreneurs, investors, businesses, and the entire energy economy through cap-and-trade is no way to promote growth. Nor is unprecedented command-and-control intervention in the economy. In other words, a war on capital with an unlimited welfare safety net will do us in. Plus, Mr. Obama’s massive health-care expansion plans will end up bankrupting the entire nation.

This is his responsibility; he owns the problem now. When will he stop?

And speaking of command-and-control intervention, the public-interest group Judicial Watch secured hundreds of pages of documents from the Treasury Department through the Freedom of Information Act which show how former Treasury man Henry Paulson crammed $750 billion in taxpayer money down the throats of our largest banks last October. Some of them didn’t even want it. But it was crammed down anyway.

In my view, the TARP capital injection did more harm than good. What unfroze credit markets was FDIC interbank loan guarantees, FDIC guarantees of long-term bond borrowing by banks, the guaranteeing of money-market funds by the FDIC, the Fed, and the Treasury, and of course the Fed’s own massive printing-press liquidity injections, which generated a steeply positive yield curve and large-scale money-supply growth.

TARP was originally supposed to rid banks of some of their toxic assets through a reverse — or Dutch — auction. But the subsequent Paulson decision to use the $750 billion TARP to purchase capital in the banks amounted to a duplicitous bait-and-switch. And that gave the government substantial control over bank compensation, dividends, repurchase agreements, and other operations that rode roughshod over investor-shareholders.

And it ain’t over yet. In today’s news, there’s more TARP coming for insurers — a particularly bad idea, as I wrote a month ago. Additionally, TARP may be used to backup the tax-exempt municipal-bond market and might even be used to help bailout the pension plan of America’s biggest trucker, YRC. And FDIC chair Sheila Bair told Bloomberg News that some bank CEOs will be replaced — despite shareholder votes to keep them.

So Paulson’s TARP has morphed into a command-and-control economic tool used by the Obama administration to exercise unpredicted intervention into the American economy.

Oh, and did I mention that the latest auto fix from Team Obama will blow off bondholder contract rights in the GM deal, just like Team Obama did with Chrysler?

Wednesday, May 13, 2009

Does anybody really believe that adding 50 million people to the public health-care rolls will not cost the government more money? About $1.5 trillion to $2 trillion more? At least.

So let’s be serious when evaluating President Obama’s goal of universal health care, and the idea that it’s a cost-cutter. Can’t happen. Won’t happen. Costs are going to explode.

Think of it: Can anyone name a federal program that ever cut costs for anything? Let’s not forget that the existing Medicare system is roughly $80 trillion in the hole.

And does anybody believe Obama’s new “public” health-insurance plan isn’t really a bridge to single-payer government-run health care? And does anyone think this plan won’t produce a government gatekeeper that will allocate health services and control prices and therefore crowd-out the private-insurance doctor/hospital system?

Federal boards are going to decide what’s good for you and me. And what’s not good for you and me. These boards will drive a wedge between doctors and patients.

The president, in his New York Times Magazine interview with David Leonhardt, said his elderly mother should not (in theory) have had a hip-replacement operation. Yes, Obama would have fought for that operation for his mother’s sake. But a federal board of so-called experts would have told the rest of us, “No way.”

And then there’s the charade of all those private health providers visiting the White House and promising $2 trillion in savings. Utter nonsense.

And even if you put aside the demerits of a government-run health system, Obama’s health-care “funding” plans are completely falling apart. Not only will Obama’s health program cost at least twice as much as his $650 billion estimate, but his original plan to fund the program by auctioning off carbon-emissions warrants (through the misbegotten cap-and-trade system) has fallen through. In an attempt to buy off hundreds of energy, industrial, and other companies, the White House is now going to give away those carbon-cap-emissions trading warrants. So all those revenues are out the window. Fictitious.

Anyway, the cap-and-tax system won’t pass Congress. The science is wrong. The economics are root-canal austerity -- Malthusian limits to growth. And there are too many oil and coal senators who will vote against it.

All of this is why the national-health-care debate is so outrageous. At some point we have to get serious about solving Medicare by limiting middle-class benefits and funding the program properly. There is no other way out. We can grow our way out of the Social Security deficit if we pursue pro-growth policies that maintain low tax and inflation rates. Prospects for that don’t look any too good right now, though it could be done. But government health care is nothing but a massive, unfunded, middle-class entitlement problem. (The poor are already in Medicaid.)

Sen. Max Baucus (D., Mont.) proposes to solve health care by limiting employer tax breaks. He’s on to something, but he’s only got half the story. All the tax breaks for health care should go to individuals and small businesses. Let them shop around for the best health deal wherever they can find it with essentially pre-tax dollars.

Additionally, insurance companies should be permitted to sell their products across state lines. And popular health savings accounts -- which combine investor retirements with proper insurance by removing the smothering red tape -- should be promoted. This approach of consumer choice and market competition will strengthen our private health-care system.

So private enterprise can coexist with public health care and not be crowded out by the heavy-handed overreach of government. But the Obama Democrats are determined to force through a state-run system that will bankrupt the country.

I’m not somebody who obsesses about the national debt or deficit. But I have to admit: Today’s spending-and-borrowing is blowing my mind. As a share of GDP, we’re looking at double-digit deficits as far as the eye can see. Over the next ten years, the CBO predicts federal debt in the hands of the public will absorb 80 percent of GDP. And that doesn’t include the real cost of state-run health care. Other than the temporary financial conditions surrounding WWII, we’ve never seen anything like this.

The president’s grandiose government-takeover-and-control strategies are going to make things worse and worse -- that is, unless members of that tiny band known as the Republican party can stand on their hind legs and just say no. The Republicans must come up with some pro-competition, private-enterprise alternatives for health, energy, education, taxes, and trade that will meet the yearning of voter-taxpayers for a return to private-enterprise American prosperity and opportunity.

Free-market competition will lower costs in health care just as it has every place else. It also will grow the economy. The GOP must return to this basic conservative principle and reject Obama’s massive government assault

That seems to be the message coming from California Governor Arnold Schwarzenegger who is considering legalizing marijuana in his state. Basically, Mr. Schwarzenegger just wants to tax it so he can balance his state's out-of-control budget. We debated the Governator's controversial proposal on last night's Kudlow Report.

Last week, President Obama proposed to severely restrict "deferral," supposedly to "eliminate tax breaks for companies that move jobs offshore." In other words, he basically blasted American-based international corporations as tax cheats and is launching a big tax hike on all of them.

Yet, as my friend Dan Mitchell explains in this new video from the Center for Freedom and Prosperity, America's current tax laws are already very punitive for American companies that compete in the global marketplace. The president's proposal will make a bad situation even worse.

Friday, May 08, 2009

This week on CNBC’s Kudlow Report I repeatedly called for the resignation of New York Fed chairman Steve Friedman over his blatant conflicts of interest with Goldman Sachs. I was not alone. Among others, two banking-industry heavyweights — former FDIC chairman Bill Isaac and former Cleveland Fed head Lee Hoskins — both agreed with my resignation call on Wednesday night’s show. So I was delighted to learn last night, just before going on-air, that Friedman had resigned his position at the New York Fed effective immediately.

I’ve known Mr. Friedman for many years. He is a good man. But he demonstrated extremely poor judgment and made a bad ethical mistake. According to the Wall Street Journal, during his tenure at the New York Fed, Friedman was also a director on Goldman’s board and had a large holding in Goldman stock. Of course, this was a violation of Fed policy due to Goldman’s status (as of September 2008) as a bank holding company. The New York Fed asked for a waiver, which the Fed, for some unknown reason, granted. To make matters worse, while weighing this request, Friedman purchased an additional 37,000 Goldman shares which have since risen almost $2 million in value.

It’s clear that Friedman crossed the line. A very bright line. No director of any regional Fed bank should have any connections with regulated financial institutions like Friedman had with Goldman Sachs. That’s a huge conflict of interest.

So my hat goes off to Steve Friedman for stepping down. Good for him. The American capitalist system must never be rigged for the benefit of a bunch of insiders. There must be a firm zero-tolerance policy against such self-dealing shenanigans. It poisons the system and sends entirely the wrong message to Main Street about Wall Street’s relationship with its regulators.

I would like to tip my hat to the Wall Street Journal’s Jon Hilsenrath and Kate Kelly. They deserve a big gold star for shining the light on this important story. They did what good journalists do; they served as disinfectants to the system. Both ought to be commended.

A parting thought: This whole Friedman episode looks like yet another unfortunate example in a long line of growing TARP corruption. Make no mistake: TARP is a corrosive, corrupting, and demoralizing influence on our banks and the rest of the economy. It is a symptom of the slippery slope we are sliding into with Team Obama’s big-government, bailout-nation vision and agenda. The Friedman mess is merely symptomatic of this growing problem inside our system.

It is time we all opened our eyes to the mess before us. Enough already. We can do much better.

Hat tip to my friend Michael Barone, who coined the term “gangster government” to describe Team Obama’s bullying threats against the senior bondholders in the Chrysler bankruptcy, where constitutionally backed contract rights have been overturned. It shows the corruptive nature of the whole TARP program and the government’s control along with it. This is corroding the animal spirits of democratic capitalism, which rely on the rule of law.

Here’s my interview with Tom Lauria from last night’s Kudlow Report. Lauria represents the senior bondholders who were trampled on by Team Obama.

LARRY KUDLOW: We have a CNBC exclusive—the head of the financial restructuring and insolvency group at the great law firm, White & Case, Mr. Thomas Lauria. Mr. Lauria thanks very much for coming on.

THOMAS LAURIA: Thanks.

KUDLOW: I want to ask you, in these bondholder meetings, with the White House automobile task force, Rattner and Bloom, did they bully? Did they threaten? Did they threaten IRS investigations? SEC investigations? What is your take on this? I heard your radio interview. I played it on my radio show on WABC. It’s tough stuff. I think this is TARP criminalism, but you tell me.

LAURIA: Well, there are a lot of things going on here that really aren’t in keeping with the way you’d expect a negotiation to go to save a company like Chrysler, much less one involving the government. I’m kind of in no comment mode on the whole Perella-Weinberg situation. But I can elaborate on things that have happened through the process and with respect to my current clients.

KUDLOW: I mean was there bullying in those meetings? I have heard from other sources that there was. And some of this stuff is pretty mean and nasty. And that ain’t the American way. What is your take?

LAURIA: Well let me tell you. With respect to the group of investors that I represent, the irony is there really wasn’t any negotiation, or any direct contact with the task force, until after the bankruptcy was announced. We were negotiating with the steering committee of the first lien lenders. There were eight lenders on that committee, four of whom were TARP recipients and four who were not. And you know, we repeatedly reached out through that steering committee to try to get into Washington to sit down with people, to get into an environment where we could find a commercially reasonable resolution. And you know, we got the “Heisman.”

You know, every time we sent a proposal, it was leaked to the press. The negotiation was you know, political falderal. It wasn’t really ever a business conversation. And when we got to the last minute, there was a separation of direction between the TARP recipients and the non-TARP recipients. I think there’s probably room for some speculation about that.

KUDLOW: But did they threaten? Let me go through some of the threats that have been out there in the blogosphere, and on the Internet, and from your own radio interview. Look, did they threaten for example, to release the names of the bondholders who wouldn’t go along with their plan? Did they threaten to do that?

LAURIA: Well I’ve heard that.

KUDLOW: You didn’t hear it specifically?

LAURIA: Just to be clear, my direct contact with the task force was limited to Wednesday night and Thursday morning…

KUDLOW: Right.

LAURIA: …before the chapter 11 case was filed.

KUDLOW: Did they do it then? Did they threaten to release the names of the bondholders then?

LAURIA: No.

KUDLOW: All right. Did they threaten to invoke an IRS or SEC investigation? Because I have heard from other sources that they did. An IRS investigation. An SEC investigation. This is like Richard Nixon Redux.

LAURIA: Well I did call my accountant to make sure everything was on the up and up.

KUDLOW: Sorry?

LAURIA: I did call my accountant to make sure everything was square.

KUDLOW: So are you telling us that they made those threats?

LAURIA: No.

KUDLOW: You don’t know that for a fact?

LAURIA: Correct.

KUDLOW: All right, let me go on. Regarding the issue of the bondholders themselves, has this Team Obama—Rattner and Bloom and so forth—have they violated constitutional principles by trampling on contract rights of the bondholders?

LAURIA: Well I think they’ve done so flagrantly. I don’t think that there’s any question about it. They have cooked up a scheme to try to end run contractual and statutory priority.

And you know I got to tell you, I wouldn’t be dismayed about this—so much of it was a private party and private parties try things in deals and negotiations and litigations all the time. But I think when a branch of the government that is charged with enforcing the Constitution, I think intentionally and knowingly tries to get around the law in order to advance what I think are political interests over clear contractual and legal interests, I think that’s a real problem. And I do think it calls into question the Constitution.

KUDLOW: I mean they’re using bailout nation and TARP as their lever. That’s what they’ve done from day one. And when I read Neil Barofsky—he’s the special inspector general for TARP—and I looked around, I mean to some extent this whole TARP process has degenerated into corruption. You have a thought on that? You’re describing corruption! We are corrupting the Constitution and contract law.

LAURIA: Well I’d like somebody to point out to all of us what statutory scheme the government is acting under when it takes control of an auto manufacturer, as has happened here. TARP applies to financial institutions, and Chrysler is not a financial institution. I think we all know that. And Chrysler is not with any other regulatory scheme of the government that allows it to effectively take over the corporate governance of the company. But that has effectively happened here...

KUDLOW: How about this irony—I’ve got to ask you this Tom. According to the White House, “we must save the American auto industry.” But we are giving Chrysler away to an Italian car company. Do you find that ironic? Or bizarre?

LAURIA: I think it’s both. And I don’t think it has much to do with the truth.

KUDLOW: Right. What is the truth? What is the truth? Was the UAW bailed out? Is that the truth?

LAURIA: Well if you look at the numbers in terms of the dollars that the government has put into Chrysler, and you look at the dollars that are being paid out to labor-related interests— including the pension, VEBA, other benefit programs, etcetera—it’s interesting that the two amounts roughly match up. About $10 billion going in, and $10 billion going out. It seems like Chrysler is just a vehicle for the government to pay its labor friends.

KUDLOW: Is this redistribution from bondholders to union health trusts? Is that what’s going on?

When it comes to fighting for free markets and railing against government intervention in the economy, no one on TV does it better or more passionately than economist Larry Kudlow of CNBC. The anchor of “The Kudlow Report (7-8 p.m. EST) and co-anchor of “The Call,” (11-12 p.m. EST) is a former Reagan administration economics adviser and now CEO of Kudlow & Co., an economic research firm. A nationally syndicated columnist, he also has his own blog, Kudlow’s Money Politic$ (kudlowsmoneypolitics.blogspot.com) and is a regular contributor to National Review and National Review Online. On Friday, at the end of a week in which we saw Chrysler start down the road to bankruptcy and learned that the Gross Domestic Product had fallen 6 percent over the last six months, I called Kudlow at his office in New York to see if he was still upbeat about the chances for a short-term economic recovery.

Q: You specialize in finding signs of recovery -- “mustard seeds,” as you call them. Did the 6 percent GDP percent drop or any of the other events of this week dent your overall optimism?

A: No. There are cross currents. The best part of the story is the economic statistics coming out of Washington are looking better. You’re right about GDP, but inside the report, consumer spending was actually stronger – up 2 percent – and inventories really crashed – over a $100 billion decline. So it looks like the consumer is stabilizing or even improving, because gasoline prices are so low it’s boosting consumer incomes and boosting purchasing power. Even though the unemployment rate is going up, still over 90 percent are still working. I think that was a big plus.

You’ve got some other reports…. Business orders are rising. Manufacturing is improving. Some of the regional manufacturing reports from the Chicago Fed and the Richmond Fed showed strong improvement. It’s all pretty good stuff, actually. I think it’s safe to say that the worst is over. There’s another report I want to cite: We’ve had now three or four weeks of declining jobless claims. That’s a leading indicator of the economy. For the first time it’s starting to roll over and go back down, and that’s very important.

Q: In the short run, you said on TV this week we might hit 10,000 in the Dow by summer?

A: Yeah, I think so. I think the stock market is recovering. You’re up about 30 percent from early March. I don’t know whether it gets to 10,000 or not, but 10,000 is a good benchmark. I think that’s part of the recovery story.

I think behind that the key factors -- the key “mustard seeds” for me -- have always been this six-month, seven-month narrative of mine: The Fed is pumping in new money like crazy. Energy prices have just crashed from a year ago or last summer – most importantly, gasoline prices. That’s like a tax cut for the economy.

So easy money and lower gasoline prices and, more recently, lower mortgage rates, are all very helpful. That’s like another tax cut. From energy and mortgage rates alone, some people have guestimated a $500 billion tax-cut effect. And the Fed has created about $650 billion of new M-2 (the amount of money in circulation) and the Fed’s balance sheet – which is the ultimate measure – has risen by over $1 trillion. That’s a lot of money, my friend.

I don’t think much of Obama’s so-called stimulus plan. I don’t think government spending stimulates the economy. There are some tax credits in there that probably will help in the short run. They’re not real tax cuts because they don’t change marginal rates, but there is a cash effect that will help low-end consumers. But it’s a very weak impacter.

But I think easy money from the Fed, lower gasoline prices and lower mortgage rates set the stage for recovery. I think GDP will be positive in the third and fourth quarters. I think they are going to be stronger than people think. I don’t see this as a long-run story. It’s just a little cyclical rebound.

Q: In the long run, shouldn’t we be terrified by the prospect – or the near certainty – of serious inflation because of all that money being pumped into the economy?

A: No doubt about it. It’s down the road – you’re talking about maybe two years. My view is that we’ll cross that bridge when we get to it. Ultimately, you may be right. There’s no question that the longer-run threat of inflation is something to think about. In terms of what we saw this week, look: President Obama is waging war on investors. He’s waging war against businesses. He’s waging war against bondholders. These are very bad things.

Obama’s team is riding roughshod over bond contracts, over any private-property contracts. They are riding roughshod over shareholders. They have a complete disregard for investors, and this is very bad. It is going to create a reluctance to invest. It drains the animal spirits. It hurts risk-taking. These are very bad things.

Q: You are very critical of the president ‘s overall direction, right?

A: Really, the broad-based issue here, besides waging war against investors, is an unprecedented effort to control the economy. It’s industrial planning. It’s intervention on a grand scale. It’s a lurch to the left. It’s really an attempt to reverse Ronald Reagan’s deregulation and low-tax policies that lasted for close to 30 years. He’s trying to change the Reagan agenda into a very substantial government regulation of business and the economy.

Secondly, the tax hikes on investors and upper-end individuals and overseas business profits is a bad idea, in my opinion; it reduces incentives to work and invest. But also I think you are going to see many more tax-hike proposals from Team Obama. I wouldn’t be at all surprised before the year is out if we didn’t see a proposal for a value-added tax, because he’s running just gigantic spending and borrowing plans.

I looked at the Congressional Budget Office numbers and really I’m not usually a deficit hawk because I think you can grow your way out of it, particularly if you are reducing tax rates. But I think these are numbers that are beyond the pale. You are looking at an average deficit that is about 6 to 7 percent of GDP in the next 10 years -- each and every year. In the immediate year it’s going to be way above that. It’s going to be 12 or 13 percent. Then it comes down to 6 or 7 percent; that’s a bad number.

And the debt burden grows to 80 percent of GDP, according to the CBO, in the next five to 10 years. I think that -- plus the effort to control business and the breaking up of these bond contracts, which you see with the fight over General Motors and Chrysler -- are anti-growth. Every one of them is anti-market. These things are really going depress our long-run potential to grow. That’s what really concerns me. It’s my biggest issue.

Q: Obama has such an array of spending plans. Is there any single one that worries you?

A: The single biggest thing I worry about is cap-and-trade, because that would be massive regulation of businesses and massive tax increases. The cost structure of business in the whole country will go up by somewhere between 30 and 40 percent, according to estimates. It will slow down the economy and will really hurt corporate profits and will really damage consumer spending.

Q: If you had had a chance this week to ask President Obama a really tough, scolding, loaded question at his press conference about one of his economic policies, what would you have asked him?

A: I would have asked him why he thinks government ownership of banks or car companies or Fannie Mae or Freddie Mac is better than bankruptcy courts. I would have asked him why he believes that the White House can pilot these stressed areas better than the market. I regard bankruptcy courts as part of the market process to restructure failed enterprises. That’s what I would have asked him.

I would also have asked him – and this may have come up – whether there is an end game to this or whether it is unlimited. He claims there is an end game, but he has given us no evidence of that. The next step is going to be gigantic intervention into health care, gigantic intervention into energy, gigantic intervention – possibly – into unionization, because I think they are going to make a run at the so-called “card-check” bill, which stops the secret ballot for unionization. I think that is a huge negative for productivity and growth.

Q: You were very critical of President Obama’s handling of the Chrysler bankruptcy deal – you called it “left-wing demagoguery.”

A: Yeah. His attack on investors and bondholders is shameful, absolutely shameful. He says he wants people to save more, and yet he doesn’t want them to save through investment. I know many of these bondholders personally. I talk to them. These guys represent teachers and firemen and police and widows – the whole nine yards. Their job is to invest their clients’ money. Why is that bad?

Q: On your show, you are an unabashed cheerleader for capitalism, but there seem to be so few people like you in the media, in business -- even on CNBC, which isn’t crawling with leftists. But they are not too many Larry Kudlows, either.

A: Yeah, we cover the gamut. But I continue to argue that economic freedom is vital, and that free market capitalism -- with all of its faults and the possibilities that we do have recessions from time to time -- is nonetheless the most efficient growth engine out there. I think that Obama is moving us away from free markets and towards government controls. That’s the bottom line, and I don’t like it one bit. And I think there’s a limit to the stock market rally. That’s the key. I usually argue for a long-run view, but right now I think investors have to be more activist in managing their portfolios because I don’t think you can just invest for the long run. You have to be rather cautious.

Q: Republicans seem pretty stupefied. They have no leader. They seem afraid to stick up for the market in a lot of ways. Do you see any “mustard seeds” in the future of the GOP?

A: I think the party is really dead. I am sure that there are “mustard seeds,” in the sense that you can look at individuals who have some good ideas about trying to roll back Obama’s regulations – in the Senate people like DeMint, Coburn, Kyl. Over on the House side, you’ve got some terrific young people – Paul Ryan or Jeb Hensarling. But they are just individual House members and senators. You don’t have any national figures -- perhaps Mitt Romney. Ok, he’s a classy guy and perhaps Mitt is destined for greater things. But at the moment, I wouldn’t say he is a force.

I actually take the view that the most important Republican spokesman right now is Dick Cheney. An odd view, perhaps, but I think that what Cheney did on the CIA interrogation issue was very interesting, when he pushed back and said, “A), releasing these memos is a terrible idea; and B), if you are going to go there, let’s release the good information that helped keep us safe.” He really rattled the Obama White House by doing that because of his own force and his intellect. I think that on economic policy we are going to see Dick push back also.

Q: And Cheney would get the attention from the media?

A: Exactly. Exactly. So therefore I am quite interested in what he is intending to do.

Q: Is there anything that can happen that would turn you into a pessimist – a doom-and-gloomer -- when it comes to the fate of free market capitalism?

A: Well, if you let market forces go, you’re going to be fine. If you let them play out, if you leave them alone, you’re going to be fine. But the more we attempt to regulate the market and stifle these incentives, the worse we’re going to do. The country will survive. We’ll see in the elections in 2010, I think, a lot of opposition to Obama’s policies.

Obama’s approval ratings are good but they are not great. They are about in line with many prior presidents. He’s more popular than his policies are. I think if Republicans mount a good campaign next year they’ll hopefully pick up a number of seats and slow this thing down. But right now we are moving in the wrong direction. It’s that simple. We will get a cyclical economic rebound but I don’t think it is going to be anything to write home about.

* * *

Bill Steigerwald is a former columnist and associate editor at the Pittsburgh Tribune-Review who’s also worked at the Pittsburgh Post-Gazette and the Los Angeles Times. E-mail Bill at bsteige@verizon.net If you're not a paying subscriber to our service, you must contact us to print or post this column on the web. Distributed exclusively by Cagle Cartoons, Inc. Cari Dawson Bartley cari@cagle.com 800 696 7561.

About Me

Larry Kudlow

Lawrence Kudlow is CNBC’s Senior Contributor. For many years, he was the host of CNBC’s “The Kudlow Report”. He is also the host of The Larry Kudlow Show, which broadcasts on Saturdays from 10am to 1pm ET on WABC Radio and is syndicated nationally by Cumulus Media. He is also a nationally syndicated columnist and a former Reagan economic advisor. CNBC's The Kudlow Report also airs on Sirius (ch.129) and XM (ch.127) weeknights at 7pm ET.